What Is a Direct Debit?

You’ve probably heard about direct debit not even once, but do you exactly know what does it mean? Read the full definition to get the answer.

Sometimes a direct debit is also called pre-authorized debit (PAD) or pre-authorized payment (PAP). In short, direct debit is a type of pre-authorized payment which allows a bank to pay the certain amount (e.g. loan repayment) directly to a bank or company at regular intervals. Money is automatically taken from your bank account, so you can use it to pay your regular bills and easily organize your payments. Pretty clever, don’t you think?

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So how it works?

When you set up a direct debit, a service provider or a company you want to pay on a regular basis (such as a private health insurer), can automatically withdraw money from your account at certain periods. It’s a convenient way to pay for the services (or your bills), but you need to remember to have enough money in your account.

Direct debits are available in many countries, and are made under each country’s rules. You should know that there is the Single Euro Payments Area (SEPA), which comes with possibility of making Euro-denominated cross-border (and domestic of course) direct debits. As you can guess, the SEPA is in Europe, and in the United States there is the Automated Clearing House network to processing direct debits.

Direct debit differs from standing order, because the company you are paying may change the period or amount taken from you. Of course, you will be notified about this situation (at least you should be), e.g. by email or via your account of the company’s website.

How to set up a direct debit?

To set up a direct debit, you just need to choose the amount and determine the regular intervals or set dates. When you choose a variable payment, it’s important to check the amount before it’s deducted from your account to be sure how much should be taken out.

Before you set up a direct debit, check precisely the service provider terms and conditions to make sure you can trust him – it’s about your money, though. Also, you need to know that you can start, change or stop the automatic payment any time.

If you want to set up a direct debit, make sure that it fits to your budget and, if possible, set the date for your payment debits for the day after your payday.